Budgeting
Budgeting
What is Budget? Budget is Quantitative expression of future plan about Revenues and Cost. What is Budgeting? Budgeting is part of the overall process of planning and control. A budget is a plan which will assist in achieving objectives. Purpose of Budgeting: Ø Planning: Budgets are primarily statements showing the operational planning of an organization. Ø Co-ordinating: Budgeting process necessitates inter departmental dialogue, which ensures that individual departmental budgets fit in with the common organizational goal. Ø Motivation: Budget motivates managers to perform in line with the organizational goals 1 objectives and encourage team spirit while meeting the goals. Ø Control: Budgetary control helps management to take timely corrective action in cases where accrual performance is not in line with the budget. Ø Performance evaluation: Manager's performance is evaluated in the basis of whether his department achieved the budget target.
W W U
ØCommunicating: Necessitates communication from the top to bottom about the plans to be implements and a flow of feedback from the supervisory level to the top management. Budgeting Process: Ø Establishment of a budget committee: To compile all the functional budgets into a master budget. Ø Preparation of an organizational chart: To effectively delegate the authority and responsibility.
By Zubair Arshad
Page 1
Budgeting
Ø Availing various services from accounting staff: To make use of past information and instruction on budget preparation to prepare timely budgets and coordinate between different departments. Ø Preparation of budget manual: To express objective of budget and lay down programmers to be followed while devising budget. Stages in Budgeting Process: Ø Determining the budget period: Depending on the nature of business and business policy the budget period is decided. Ø Determining the limiting factor The factor that restricts the company profitability is called limiting factor. Ø Determining the principle budget factor: The factor that Limit Company is known as principal budget factor and it is this factor that will be budgeted first. Ø Preparing functional budgets: Ø Negotiating budget: At every level, negotiations take place and the budget is agreed upon. Ø Final acceptance of the budget: After the necessary adjustment in initial budgets budget committee prepare master budget. Ø Ongoing review of the budget: Budgets are continuously revised and updated to give effect of changes in the budget environment and variances, if any.
By Zubair Arshad
Page 1
Budgeting
Question: A company has two products A & B sales at Price are budget as following. Product
Units
A
10,000
B
2,000
Price ($) 90 100
Company has following opening and required closing finished inventory levels: Product
Opening Inventory
Closing Inventory A200
2200
B100
100
Product A & B will require 3 different materials. Materials required per unit in kg are as following: Material
Product A
X4Kg
6Kg
Y6kg
6kg Z1 2 4
Product B
4 4 Opening and Closing
inventory and Price of Material is following: Opening
Z
Closin
2
860
g
3
0
4400
4
In order to meet required production Labour wi11 work as following: Product By Zubair Arshad
Hrs Page 1
A8 B12 By Zubair Arshad
By Zubair Arshad
Page 3
Page 1